7 Types of Organizational Structures +Examples, Key Elements
- Published March 15, 2022
- Updated: February 5, 2024
Hiring skillful employees is only the first step towards building a high-performing organization. You need to make every team member fit in. You need a clear organizational structure.
Large enterprises require an established, organized structure to coordinate large numbers of employees and avoid chaos. But smaller businesses and startups rarely think of designing an organizational structure in the first place.
This lack of structure leads to miscommunication, work delays, poor process flows, low morale, and other serious consequences that stunt business growth. In contrast, a strong organizational structure helps to coordinate teamwork, reduce conflicts, and boost productivity.
How do you build one? What’s the right type of structure for your company? Read on to learn more.
What are the common types of organizational structures?
What Is Organizational Structure?
Organizational structure is the backbone of all the operating procedures and workflows at any company. It determines the place and the role of each employee in the business, and is key to organizational development.
A clear structure allows every team member to be involved. When employees know what they’re responsible for and who they report to – which isn’t the case in many fast-growing companies – they’re more likely to take ownership of their work.
To build an org structure, you need to consider your business size, life cycle, goals, and positioning. Apart from considering the current environment your company operates in, you should also think of where you want to see the organization in five years – as its a pillar of organizational health.
Basic Elements of Organizational Structure Design
An organizational structure is based on a range of elements, including:
- Work specialization
- Departmentation
- Chain of command
- Span of control
- Centralization/Decentralization
- Formalization
Work specialization
Work specializations define how responsibilities are split between employees based on the job description. It’s used to split projects into smaller work activities and assign digestible tasks to individual employees. The most common results of improper specialization are low efficiency and burnout.
Documentation
Documentation is an act of grouping specialists on the basis of the job description, skills, location, or other factors that connect them.
The biggest challenge is choosing the criteria for departmentation. In many cases, it’s no more enough to apply functional departmentation – where employees are grouped based on the tasks they perform. Startups often go for matrix departmentation that involves combining two types of departmentation and takes the best out of both worlds. For instance, functional departmentation can be joined by geographical departmentation to better serve clients in different locations.
Chain of command
Chain of command represents a system for passing instructions and reporting within an organization. Ideally, it distributes the power, supports knowledge sharing, and encourages employee accountability.
The traditional chain of command makes decision-making more complex and does not allow for much flexibility. On the contrary, modern approaches strive to enhance employee autonomy and avoid micromanagement.
Span of control
Span of control regulates the number of direct reporters managed by a single supervisor. It heavily depends on the three aforementioned elements of organizational structure. Furthermore, to identify the right span of control, you need to evaluate your leaders’ capacity, workplace size, and experience level of employees.
Centralization and decentralization
Centralization and decentralization are the concepts defining how managers, as well as employees, give input on company goals and strategy. While centralization gives leaders the ultimate control over decision-making processes, decentralization allows employees to impact business decisions. We’ll dive into centralized and decentralized organizational structures in the further section.
Formalization
Formalization determines to which extent business processes, policies, and job descriptions are standardized. It may regulate communication between employees and managers, workplace culture, operational procedures, etc.
Centralized vs. Decentralized Organizational Structures
Back to centralization and decentralization. When designing an organizational structure, you’ll need to choose a side. Do you want to implement top-down or bottom-up management?
Centralized organizational structure
As has been said, in a centralized organizational structure, decisions are made by top managers and are distributed down the chain of command.
For sure, the structure has a range of advantages. It ensures greater control over business processes. But most importantly, it only includes highly experienced professionals that are able to foresee the effect of decisions made in the long run.
The biggest drawback of a centralized organizational structure is the amount of time the decision-making process takes in large companies. Imagine a customer support manager being asked to implement an exclusive package for a high-ticket customer. To get permission, they’d need to run the request up the chain of command and wait for it to be processed by top management. When the request is approved, a high-ticket customer might no longer be there.
Decentralized organizational structure
To avoid this issue, large organizations turn to decentralization. In a decentralized structure, lower-level employees pinpoint issues and make decisions before communicating it to upper management. Greater autonomy not only empowers employees but also eliminates process delays, which are common for centralized systems.
However, decentralization also brings coordination challenges and higher expenses.
Often, it’s recommended that early-stage startups and small businesses go after a centralized organizational structure. Fast-growing companies and enterprises usually choose a decentralization framework.
7 Types of Organizational Structures
The key purpose of any organizational structure is to make the processes more straightforward. However, there are many ways to achieve that.
Let’s look into the seven common types of enterprise organizational structures to help you decide how you want to develop your company and its various departments and teams.
1. Functional structure
A functional structure groups employees into different departments by work specialization. Each department has a designated leader highly experienced in the job functions of each employee supervised by them.
Most often, it implements a top-down (centralized) decision-making process where department managers report to upper management. Ideally, leaders of different teams communicate regularly and coordinate their strategies while lower-level employees have little idea of the processes taking place outside their department.
The main challenge companies with a functional structure face is the lack of coordination between departments. Employees may lose the larger company context when focusing on very specific tasks and failing to interact with members of other departments.
To create a functional organizational structure that works, you’ll need to train leaders to foster collaboration across departments.
Examples of organizations with a functional structure include: Amazon, Starbucks.
- Scalable.
- Operational efficiency.
- Encourages employees to specialize their skillsets.
- Empowers employees to focus on their specific role and responsibilities.
- Empowers teams and departments with clear, specific goals that they can work towards.
- Leads to poor cross-department communication.
- Builds silos.
- Creates obscure roles, processes, and workflows that are company or industry-specific.
2. Divisional structure
A divisional structure organizes employees around a common product or geographical location. Divisional organizations have teams focused on a specific market or product line.
Examples of companies applying a divisional structure are McDonald’s Corporation and Disney. These brands can’t help but split the entire organization by location to be able to adjust their strategies for audiences representing different markets.
These smaller groups are relatively independent and mainly follow a decentralized framework. Still, the leaders of each department are likely to operate under centralized corporate management. It means that company culture is dictated by top management, but operational decisions can be made by each division independently.
Giants such as McDonald’s and Disney also add functional units to their structure for better control.
Examples of organizations with a divisional structure include: Disney, GM, McDonalds.
- Understand individual markets better.
- Promotes flexibility.
- Faster responses to changes or needs that are locality or regional-based.
- Autonomous approaches lead to team experimentation and allow organizations to test multiple strategies, driving innovation.
- Duplication efforts.
- Poor documentation.
- Lack of organizational communication.
- Departments compete against one another.
- Lack of hierarchy understanding.
3. Matrix structure
Within a matrix organizational structure, team members report to several managers at once. Wait, what’s the point?
Having multiple supervisors allows for company-wide interaction and faster project delivery. For instance, when answering to functional managers and project managers, employees have a chance to collect experience outside their team. While functional managers can help to solve job-specific issues, project managers can bring in knowledge or talents from other departments.
If you go after a matrix organizational structure, you’ll need to find a way to avoid authority confusion and prevent conflicts between managers.
Examples of organizations with a matrix structure include: Caterpillar, Phillips, Texas Instruments.
- Flexibility to pull employees into more important projects at will.
- Empowers employees to build and test skillsets outside of their pre-determined roles.
- Faster project deliverables.
- Often leads to conflicts among leaders and managers.
- Confusion on authority.
- Frequency of change.
4. Team structure
A team-based organizational structure creates small teams that focus on delivering one product or service. These teams are capable of solving problems and making decisions without bringing in third parties.
Team members are responsible for managing their workload and have full control over the project. Team-based organizations are distinguished by little formalization and high flexibility. This structure works well for global organizations and manufacturers.
Examples of organizations with a team-based structure include: Apple, Cisco, Google, Whatfix.
- Drives growth and innovation.
- Promotes lateral career moves.
- Provides experiences across departments and teams.
- Experience is valued over seniority.
- Less emphasis on management.
- Is more agile.
- No clear authority.
- Career path growth is not clear.
- Not formalized.
5. Network structure
A network structure goes far beyond your internal company structure. It’s an act of joining the efforts of two or more organizations with the goal of delivering one product or service. Typically, a network organization outsources independent contractors or vendors to complete the work.
In a network organization, teams are built from full-time employees as well as freelance specialists – this way, in-house workers can spend most of their time focusing on the work they specialize in. Such an approach allows companies to adapt to market changes and obtain the missing skills fast.
Working with individuals that aren’t integrated into your company culture results in lower formalization and higher agility.
Examples of organizations with a network structure include: Dow Chemical, H&M, IBM
- Promotes organizational agility and flexibility.
- Fosters collaboration across employees.
- Breaks down silos.
- Cultivates better understanding of industry, products, and customers.
- Creates a web of work-related relationships.
- Creates highly-specialized skillsets in employees.
- Extremely complex and convoluted.
- Lower formalization.
- High turnover.
- Feeling of inequality between full-time employees and contractors/freelancers.
- Difficult to know who has final approval.
6. Hierarchical structure
You must already have an idea of what a hierarchical structure is. It’s the most common organizational structure type that follows a direct chain of command.
A chain of command, in this case, goes from senior management to general employees through a range of executives on the departmental and team level. The highest-level executive has the highest power over the decision-making process.
On one hand, this structure enables organizations to streamline business processes, develop clear career paths, and reduce conflicts. A company hierarchy leaves no place for challenging managers’ authority, which can be good in some cases.
On the other hand, a hierarchical structure slows down decision-making and may hurt employee morale.
Examples of organizations with a hierarchical structure include: Amazon, Sony
- Obvious chain-of-command.
- Clearly defined reporting structure and individual responsibilities.
- Sets clear career path growth.
- Builds niche skills and specialities.
- Departments and teams create a sense of “we’re in this together”.
- Bureaucracy, processes, and red-tape slow down innovation.
- More resistant to change.
- Employees focus on department goals and KPIs over what’s actually most important for the company.
- Employees at the bottom of the org structure feel like they don’t have an impact.
- Feeling that there is no place to challenge authority.
7. Flat organization structure
In a flat organizational structure, there are few middle managers between employees and top managers. The structure requires less supervision, increases employee involvement, and boosts trust in the workplace.
Due to its simple nature, a flat organization structure, also called a “flatarchy”, is typically used by small businesses and startups.
Examples of organizations with a flat structure include: Value, most small businesses.
- More responsibility for employees.
- Open communication.
- Clear path of approval.
- Implementation happens fast.
- Not scalable.
- Relies on one person to be the decision-maker.
- Leads to employees with generalized skillsets, with a lack of specializations.
Is It Possible to Change an Organization's Structure?
Of course, organizational design can be reconstructed if needed. The business landscape is constantly evolving, and keeping to a structure that has worked for years might simply become inefficient.
To adapt to market changes, you might need to resort to organizational transformation which affects not only your strategy but also the structure. Whether you want to build an organizational structure from scratch or want to revisit the existing one, you’ll need to get down to the basics.
How to Design Your Organization’s Structure
Whatever structure you choose, you’ll need to make an effort to implement it. Here are eight simple steps towards designing an organizational structure from scratch.
1. Create a charter
First of all, you need to prepare documentation.
You need a project charter outlining the purpose of building a clear structure, key stakeholders, and their responsibilities. This is your rough plan for implementing an organizational structure that should give you a direction for your next steps.
When creating a charter, you’ll be able to answer the following questions:
- Why do we need to design (or re-design) an organizational structure?
- When do we start?
- Who are the key stakeholders in this project?
- What should we do first?
- Where is the company headed? Will our organizational structure be relevant in a year?
2. Build your strategy
To build a structure from scratch, you’ll need to start by outlining a long-term strategy and mapping out goals. Your future vision of your company determines which type of organizational structure will work best for you.
3. Assess your internal processes & systems
If your business has already been operating for quite some time, take a look at your current strategy and try to highlight the areas of improvement. Do you need to revisit your core ideology and company culture? You can only answer this question by talking to your employees and managers.
When you know where you stand and have a clear vision of what you want to achieve, creating an organizational direction shouldn’t be a problem.
4. Design your structure
A clear understanding of your company’s strategy lets you filter out irrelevant organizational structure types and pick the one that fits with your core values, mission, and goals.
Choose one of the seven organizational structures and use it as a template for designing a custom organizational chart. This chart is also known as an organogram – it’s a diagram used to visualize the relationships between individuals, teams, and departments within an organization
5. Create a transition plan
Next, it’s time to design an optimal workflow for implementing or switching to a new structure.
Talk to the stakeholders and decide on the deadlines for establishing a brand new organizational structure. Prepare a list of recommendations for top managers and team leaders that will help to communicate the change to the rest of the organization.
6. Implement your new structure
From there, leaders should create an implementation plan that includes training their teams to adopt new roles and skills, as well as how to follow a new decision-making and reporting framework. Week by week, employees will become accustomed to their new organizational structure and adapt to the change.
7. Monitor the impact
The transition process might take months, and it’s very likely that the performance of individual employees or even entire teams will go down at some point. However, you can assess the impact of a new structure in action only after the transition is complete.
With a new organizational structure in place, run the performance review and talk to executives. It’s important that you monitor the contribution of each individual department – chances are the changes don’t work equally well for everyone at the company.
8. Gather feedback & improve
Again, once you implement an organizational structure, it’s never too late to make adjustments. Alongside performance checks, survey your employees to learn how they feel about a new structure. It can be that their input will help you fine-tune the organizational design without extra cost and effort.
Ready to learn more about building healthy, innovative organizations? These resources can help:
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